Deck 3: Depository Institutions

Question 1

In generating spread income, depository institutions face several risks. They include:

A) Credit risk.
B) Regulatory risk.
C) Interest rate risk.
D) a and b only.
E) All of the above.

Answer 1

All of the above.

Question 2

Depository institutions accommodate net withdrawals and loan demand by:

A) Attracting additional deposits.
B) Selling securities it owns.
C) Raising short-term funds in the money market.
D) Using existing securities as collateral for borrowing from a federal agency or other financial institution.
E) All of the above.

Answer 2

All of the above.

Question 3

Loans to nonfinancial corporations, financial corporations and government entities fall into the category of:

A) Individual banking.
B) Institutional banking.
C) Global banking.
D) None of the above.
E) All of the above.

Answer 3

Institutional banking.

Question 4

Banks are highly leveraged financial institutions, which means that most of their funds come from:

A) Deposits.
B) Borrowing from the Federal Reserve through the discount window.
C) Capital gains from the sale of securities.
D) a and b only.
E) All of the above.

Question 5

The market where banks can borrow and lend reserves is called the:

A) Open market.
B) Federal funds market.
C) Discount window.
D) Money market.
E) None of the above.

Question 6

If actual reserves exceed required reserves, the difference is referred to as:

A) Spread income.
B) Secondary reserves.
C) Excess reserves.
D) Total reserves.
E) None of the above.

Question 7

The discount rate is the interest rate charged to:

A) Borrow excess reserves.
B) Borrow funds at the discount window.
C) Borrow funds from commercial banks.
D) a and b only.
E) None of the above.

Question 8

Member banks can borrow from the Fed in order to:

A) Meet short-term liquidity needs.
B) Increase their earnings.
C) Meet required reserves.
D) a and c only.
E) All of the above.

Question 9

Until the 1960, Regulation Q had virtually no impact on the ability of banks to compete with other financial institutions to obtain funds because:

A) Market interest rates stayed below the ceiling rate.
B) Market interest rates stayed above the ceiling rate.
C) Market interest rates and the ceiling rate stayed the same.
D) The ceiling rate stayed below the market interest rates.
E) None of the above.

Question 10

The capital structure of banks, like that of all corporations, consists of:

A) Demand deposits.
B) Debt
C) Equity.
D) Time deposits.
E) b and c only.

Question 11

What are the principal objectives of the risk-based capital requirements?

A) Greater consistency in evaluating the capital adequacy of major banks.
B) Capital adequacy standards that consider the risk profile of the bank.
C) Recognize liquidity factors and market price sensitivity to which a bank may be exposed.
D) a and b only.
E) All of the above.

Question 12

The Garn-St. Germain Act of 1982 expanded the types of assets in which S&Ls could invest. The acceptable list now includes:

A) Consumer loans.
B) Commercial loans.
C) Municipal securities.
D) a and c only.
E) All of the above.

Question 13

The principal assets of savings banks are:

A) Mortgage-backed securities.
B) Residential mortgages.
C) Commercial mortgages.
D) Government securities.
E) All of the above.

Question 14

The primary source of funds for credit unions is:

A) Issuance of debt securities.
B) Issuance of equity securities.
C) Deposits of their members.
D) None of the above.
E) All of the above.

Question 15

Regulation Q allowed the Fed to impose:

A) Geographical restrictions on branch banking.
B) Interest rate ceilings on deposit accounts.
C) Capital requirements for commercial banks.
D) Permissible activities for commercial banks.
E) None of the above.

Question 16

The borrowings by S&Ls from the Federal Home Loan Banks are called:

A) Reserves.
B) Advances.
C) Deposits.
D) Contributions.
E) None of the above.

Question 17

Since credit unions are owned by their members, member deposits are called:

A) Contributions.
B) NOW accounts.
C) Shares.
D) Certificates of membership.
E) None of the above.

Question 18

The basic motivation behind the creation of S&Ls was provision of funds for financing:

A) The purchase of a home.
B) The purchase of land.
C) The purchase of a car.
D) The purchase of government securities.
E) None of the above.

Question 19

Continual bank borrowing at the Fed for long periods and in large amounts is viewed as a sign of:

A) A bank's financial weakness.
B) Exploitation of the interest differential for profit.
C) Financial health due to increased loan demand at the bank.
D) a and b only.
E) All of the above.

Question 20

A depository institution seeks to earn income from the positive spread between the assets it invests in and the cost of its funds.

Question 21

Banks use secondary reserves to meet the Fed's reserve requirements.

Question 22

Money center banks are more active in global banking.

Question 23

Depository institutions are highly regulated at both the state and federal level.

Question 24

A bank cannot invest $1 for every $1 it obtains in deposit because it must maintain a specified percentage of its deposits in a non-interest bearing account at one of the 12 Federal Reserve Banks.

Question 25

Explain why banks cannot invest $1 for every $1 it obtains in deposits.

Question 26

What are the requirements for banks to borrow from the Fed's discount window?